Cash-On-Cash Return is a valuable metric commonly used to analyze real estate investments that represents the return on actual cash invested. Since it disregards the time value of money, it is most often used during the first year of ownership.
Cash-On-Cash Return is calculated by dividing a property’s single year Cash Flow Before Tax (CFBT) and the overall initial capital investment.
As previously discussed, Cash Flow Before Tax (CFBT) is calculated by adding or subtracting various items such as debt service, capital expenditures, asset management fees, loan proceeds, interest earned, and leasing costs from Net Operating Income (NOI). As a reminder, NOI is the total of all income from the annual operation of the property after deducting operating expenses. NOI is calculated by subtracting Total Operating Expenses from Gross Operating Income (GOI).
For example, if a property has Cash Flow Before Tax (CFBT) of $15,000 and the overall initial capital investment was $300,000 then the Cash-On-Cash Return would be 5%. ($15,000/$300,000). The Cash-On-Cash Return can then be compared to the returns of alternative investments to determine whether or not the opportunity is worthwhile.